Summer School 3: How government decides what to spend our money on

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0:50Welcome back, class, to Planet Money Summer School, the only economics degree you can get just by listening. No tuition, no textbooks, no frustrating group projects. Am I right? I'm Robert Smith, and this season we are tackling power and money, The profound ways that the government influences business and the economy. This is class number three, you are what you pay for. Last week we talked taxes, how the government raises money. This week we get to decide what to spend it on. Woo! Government shopping spree. But reality check, although it seems like the government can spend an endless amount of money, it cannot do all the things it wants to do.

1:28So the big question in this week's lesson is, how do we decide? Why does the government spend so much money on some things and not other things? And honestly, is there any limit? The United States is at, let me check here, more than$36 trillion in debt. Is that too much? Kind of feels like too much. Every week we have a couple of case studies and a guest professor to teach us the big lessons. Welcome today to Aviva Arundine, director of the Hamilton Project at the Brookings Institution. What exactly does the Hamilton Project do? It's not based on the musical, right? It's not based on the musical, though it's funny.

2:08It gets its name from sort of the same rehabilitation of Hamilton that is embodied in the musical. I guess it is hard to make a rhyme based on the Hamilton Project, but of course I'm going to try. It makes multimodal proposals on quality fiscal policies. Yeah, not ready for Broadway. Moving on. And for our purposes here at Summer School, we should say that Aviva has, in the past, been inside the very government we are going to talk about, at the Treasury Department and at the Office of Management and Budget. So, Aviva, you have been there for the taxing. You have been there for the spending. And the cloud hanging over all those discussions must be the national debt.

2:50Now, of course, like as an individual, I have to pay my debts eventually. Why doesn't the government ever balance its budget? So government is different fundamentally because it has a tax base. And there are, in fact, some very good reasons that a government might not balance its budget every year. Yeah. I mean, we might be at war. That often sends up the deficits. The country could be in recession where it makes sense to spend a ton of money to perk up the economy and help people. But there's not always an emergency reason, right? Yeah. Even outside a recession, it can make sense for the government to borrow to invest.

3:30The concern, and I would say we do have this concern now, particularly as we look out 10, 20 years, the concern is when your debt is growing too rapidly relative to your economy. And that's what projections would say is going to happen in this country going forward if we don't do something that changes our fiscal trajectory. So to put it in terms of my own life, if the money I owe to the bank is growing faster than the money I make, my salary, then I'm getting deeper and deeper into this hole. And for governments, they're already in a hole and they might want to stop digging at some point. And the reason for that is that the size of your debt and the growth rate of your debt relative to your economy is sort of telling you what would you need to do if you abruptly needed to reduce your debt.

4:17Is that a manageable proposition where you have lots of policies you could plausibly pursue to do that? Or is it an unmanageable proposition? OK, so you seem to be saying if there's some huge thing the government has to spend money on, like a crisis, or perhaps the financial system starts to worry about lending the government money, we can always theoretically increase taxes as a country to stabilize the debt. But it makes a difference if you have to theoretically increase taxes by 3%, which may be manageable, or if you have to increase taxes by 10%, which is definitely going to get you in trouble.

4:54Like a 3 % tax hike is easier to sell. And, you know, we're a big country. We're a wealthy country. We absolutely have policy tools with which we could do that. But the more the debt grows as a share of the economy and the more rapidly it's growing, the harder it is to make that stabilization. So on today's show, we are going to peer inside the budget and see what we can do to slow this roll a bit. It's easy to rant about big government, but what if everything inside the budget is actually there for a good reason? Then how do you make the hard choices? Get your calculator out for after the break.

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6:58That's grammarly.com slash podcast. Planet Money Summer School, back in session. And doing math on the radio, which is always fun. Pay attention, everyone. we are going to go over everything our government spends money on in exactly 10 minutes. This is from an episode we did back in 2017. Professor Aviva Arundine, what should the students listen for in this episode? I think the question is, what are all these programs doing? What do these policies and programs accomplish? This episode was hosted by Jacob Goldstein and Stacey Vanek-Smith, and even though it was made eight years ago, the percentages of the government budget are roughly the same.

7:35One thing to mention, though, when we talk in this episode about President Trump and the Republicans trying to make budget cuts in things like Medicaid, we are referring to his first term and not the current moves in his second term to make those cuts. The more things change. Okay, here's how it's going to work. We're going to put 10 minutes on the clock, and we're going to cover the entire federal budget. Every second of that 10 minutes will be worth$6.4 billion. So the small programs, they're going to go super fast. Big programs, nothing but time. And we're going to bring in a bunch of people from Planet Money to help us out.

8:09So the first piece in our show today, Robert Smith is going to talk about Medicare and Medicaid. That is 29 % of the federal budget. So they will get 29 % of our 10 minutes. Start the clock now. You know how there's always this debate about whether the federal government should have a responsibility to pay for health care? Well, I've got news for you. It already does. The federal government pays for the health care of 120 million Americans, people over the age of 65, families with low income, people with long-term disabilities. They're all covered by Medicare and Medicaid. Medicaid and Medicare.

8:45Although I always mix them up. Everyone does. I had some embarrassing errors when I was a new health policy reporter where I would mistake these in stories and lots of people would send me angry emails. This is Sarah Cliff, a writer for Vox.com. She co-hosts the Weeds podcast. I heard a terrible way to remember it. Oh, I want to hear it. Ages ago, someone told me, you care for the old and aid the sick. Or no, aid the poor. That's what it is. See, it's a terrible one. Okay, I have a better one. Silver hair, Medicare. Underpaid, Medicaid. If we live long enough, we all get Medicare. But even if you don't consider yourself poor, you might also find yourself on Medicaid.

9:26It actually finances a lot of long-term nursing homestays. So a lot of middle, upper-class Americans eventually do end up on Medicaid when they need that kind of coverage and they've kind of whittled away their savings. And there you have it. Hey, Stacey, how much time do I have left? You've got about a minute and a half. Minute and a half. Yeah, you got it. This is the biggest part of the budget. You got some time. Okay, let's go get some coffee. Okay, let's go. We got time. We have some time. And I can explain one more thing about Medicaid. Okay, so we've all heard about Obamacare. We've all heard about how in Congress right now, the Republicans are undoing Obamacare.

10:07But what the fight is really about is the future of these programs we're talking about, the future of Medicaid. Underpaid. Underpaid. Do you want, should I get you a cup? A black coffee, please. One of the big ways that Barack Obama got people insured was to expand Medicaid. Medicaid costs are shared between the federal government and the states. The states run the programs. And Obama essentially said, we are going to give you more federal money, a larger share of our budget, if you just cover more people. And so this part of the budget pie I'm talking my way through, this got larger. So when the Republicans are thinking, how do we undo Obamacare?

10:44What they thought is, let's put some caps on the growth of Medicaid. And what that means in sort of real world terms is that if the Republican plan passes, 15 million fewer people covered by Medicaid. So if we're going to do the show again in 10 years, there might be slightly less time for government health care, perhaps. No coffee break? Maybe time for a short coffee break. You going to drink that, by the way? Um, no. Transportation, 2 % of the budget. Kenny Malone. We asked former Secretary Ray LaHood to write us a haiku. He declined. So I made one for him using words from his old speeches. A highway crumbles.

11:22Neath our wheels, one big pothole. It spreads across the roads. Thank you all very much. Thank you very much. Next up, Social Security. It accounts for 24 percent of federal spending. Jacob, take it away. Social security is really big because almost everybody gets it. In particular, almost every American over the age of 66, including billionaires. You know, if Warren Buffett wants social security, he can get it. I called up Ted Marmer to ask about this. He's an emeritus professor at Yale, expert on social security. Why does Warren Buffett get social security checks? That's a classic dumb dough under...

12:02Ouch! ...formulation. Okay. Marmer says billionaires getting Social Security is not a bug. It's a feature. When Social Security was created back in the 30s, some Democrats did want to create a version of the program where the money just went to poor people. But President Roosevelt was like, no, a program like that just won't survive politically. What we need is something that almost all working people are eligible for. And, he said, we should fund it with a special tax that almost all working people pay. That way, people will say, I paid into Social Security. I deserve Social Security when I retire.

12:36And I will vote out of office any politician who tries to take it away from me. His terms in which he expressed it was, God damn it, I'm going to be sure to have a program that no damn Congress is going to mess with because people are going to feel entitled. But I do think this leads to a lot of confusion. You know, people seem to think, oh, I contributed to Social Security. They're holding on to my money in a special box. This is not how it works. My money is paying for retired people right now, and I'm crossing my fingers that in 30 years when I'm retired, there will be 40-year-olds who are paying me.

13:12Jacob. Yes. I'll bet you any money, and I want you to pay me off by putting it in my grave. Okay. The probability that you will receive Social Security benefits for retirement is so high that you should be declared irrational for believing so. Really? Really? Why are you so confident? Why am I so confident? Because I understand the political economy of the United States. Because Roosevelt was right. Correct. Because almost everybody pays in and gets paid out, including billionaires, Marmer says social security is politically bulletproof. Social services and education, 3%. And for this segment, we wanted to get someone who is currently a beneficiary of public education, a.k.a.

13:58Jacob's Kid. Most spending in this area comes from state and local governments. The federal government's biggest education line item is grants for low-income college students. National defense is 15 % of federal spending. Stacey. We spend$1.5 billion every day on defense. And this is famously one of the most controversial parts of the budget. I mean, Democrats often come in and they want to cut defense spending. The Republicans come in and they want to raise defense spending. But somehow, in spite of all of this, if you look back over the last 20 years, the share of the budget devoted to defense has not really changed that much.

14:43And actually, that is pretty much true for most of the federal budget. It stays pretty steady. And I was totally shocked by this. So I talked to this guy, Bill Valdez, about it. He worked for the Energy Department for more than 20 years. He wrote a lot of budgets. And he told me his theory of what's going on here. You know, the real thing that keeps the budget stable is that there are all these special interest groups. Hundreds of lobbyists battling for government funds, hammering out deals with different states and different politicians. Bill says the budget status quo is really this hard-earned equilibrium.

15:17And he thinks this is a good thing, ultimately. It creates stability. So we actually have lobbyists to thank for our stable budget? Yeah. In many respects, yeah. It's like a little shout out to the lobbyists. They get so little love. I feel like that's OK. Right? Don't you think that maybe the budget should be their valentine? President Trump has proposed increasing defense spending by cutting other parts of the budget. Bill says he will have to get through the lobbyists first. Next up, income security. 13 percent of the budget. Here is Noelle King. Yes, income security. So think of this as programs for poor people.

15:57It includes a bunch of different things like the earned income tax credit, housing assistance, unemployment. Foster care is a small part of it. I'm going to talk about food stamps, which are officially known as SNAP for two reasons. Number one, food stamps are a really big program. Usage spiked during the recession. If you look at graphs, it's basically like a straight line going up. And it has stayed pretty high. More than 40 million people are getting food stamps right now. And I think there is a lot of confusion over who gets them. So let's clear that up. Two out of every three people on food stamps are kids, the elderly, or they are disabled.

16:34Of the rest, it's roughly split between people who are working but making very low wages, low enough to qualify for food stamps, and people who are not working but should be working soon because SNAP comes with work requirements. For the most part, if you are able-bodied and you don't have a job, you get cut off from food stamps after a couple of months. There you go. Interest on the national debt? 6 % of the budget. And you can look at this in two ways. One, interest rates are really low right now. So the government was able to borrow money, spend it on goods and services for Americans. Great!

17:10But you could also say this whole chunk of the budget is just the interest on all the money we owe. And what we get in return for all this money is nothing.

17:25Four more seconds.

17:29This is feeling awkward. Veterans Affairs, 5%. Sally Helm, go. Yes, they provide things like health care and disability benefits for vets. President Trump wants to boost funding for the VA, but is proposing some cuts, including one for disabled vets once they're old enough to get social security. President Eisenhower tried to do something kind of like this in the 50s. He was a five-star general, so maybe he thought he could get away with it, but he got totally shut down by Congress. We'll see how Trump does. International affairs, 1%. Nick Fountain, go. Yeah, this goes to operating U.S. embassies and consulates throughout the world, providing military assistance to allies, aiding developing nations.

18:09Everything else makes up about 3 % of the budget. Let's bring it home. Justice. That's FBI, DEA, prisons, homeland security. Natural resources and environment. Science, space, and technology. General government. That's like mowing the White House lawn and paying congressional salaries. Community and regional development. Agriculture. Energy. Done! Woo! We did it! So we made it through the whole budget in 10 minutes. And I have to say, the thing that strikes me about the budget is that half of it, more than half of it, is just made up by three programs. Medicare, Medicaid, and Social Security. And then in the rest, overwhelmingly, the biggest chunk is defense.

18:43And so there is this old line that I still love, which is the federal government is basically a big insurance company backed by a large standing army.

18:57Jacob Goldstein and Stacey Vanek-Smith from 2017. And the percentages you heard there are still roughly the same, with a couple of notable exceptions. If we were doing this show again today, Nick Fountain would barely have time to speak. If the current plans hold, the budget for international aid in embassies will be cut to far less than 1%. And the interest on the national debt. The debt is now bigger. The interest rates are now higher. The interest on the national debt is now double what it was. 13 % of the budget. Twice as much time. Ouch, indeed. Let's bring back in our professor, Aviva Aaron Dine from the Brookings Institution.

19:37As we listened to those 10 minutes of the budget, I kept thinking, why? Why does the government do these things and not other things? What's the big way to think about this? So I think you can put most of the things government does into one of two buckets. One is addressing a market failure, a case where there's something that prevents the private market from functioning well. And the other is redistributing income, so addressing a case where the private market is not giving us the distribution of resources that we as a society want. Why don't we start with market failure? What do you mean by market failure?

20:15Yeah. So this is a case where – there are lots of cases where markets work pretty well. If you want to buy a pair of shoes, market economy is going to do a pretty good job of offering you a range of shoes to buy of different kinds, lots of different characteristics. They're going to be priced pretty close to what it costs to make them. It's going to work great. This is why we don't have government shoes. Right. And anyone who suggests we should have government shoes, right, you'd have some questions. There are other things that the market is definitely not going to provide. So classic example, national defense.

20:49It's what economists call a true, a sort of pretty pure public good. We usually define this in technical terms as non-rival risk, which means that the fact that you and I both get protection from the U.S. national defense apparatus doesn't really increase the cost of providing national defense. And non-exclusive, which means you can't really say to anyone living here, we're going to carve you out of our national defense protection because you didn't pay for it. So the market is just never going to provide something like that. And then there are lots of things that aren't pure public goods, but they have some characteristics and qualities of public goods.

21:27So this is a lot of things that the federal government does like education, scientific research, infrastructure, national parks. In theory, could you imagine those being privately provided? Sure, but I think most people have a pretty strong instinct that there are reasons that those are treated as public goods, that we want to provide those on a common basis. So that is one reason why government would spend money for a market failure. The other one you said was redistribution. Which parts of the budget are redistribution and why are we doing it? Sure. So a good example of a part of the budget that is principally redistribution is the Supplemental Nutrition Assistance Program or SNAP or what used to be called food stamps that provides food assistance to people who have low incomes.

22:13whether elderly people who have low incomes, kids who have low incomes, people of working age who just lost their jobs and have low income. And that's a pretty pure case of in a market economy, if you just left the market outcome alone, many of those people would really struggle to put food on the table. And in fact, we have evidence that when you cut SNAP, people have more trouble affording food. When you increase SNAP, fewer people struggle to get food. And we've decided that that's a valuable thing to do. It's not addressing a market failure per se, but it's addressing a failure of the market to achieve the distributional outcome, in this case, lower poverty, lower rates of people who can't feed themselves, than we want.

22:59So that is the theory of how government budgets should be decided. Coming up after the break, we look at the messy reality. I don't want to spoil it, but let's just say that maybe, maybe the politicians who decide how to spend our money have some personal interests of their own.

23:51You have to know where you're going, right? What's the goal? What's the destination? By identifying those goals, you can construct a well-diversified portfolio that hopefully it helps meet those goals. For more information and important disclosures, visit Ameriprise.com slash advice. Ameriprise Financial cannot guarantee future financial results. Securities offered by Ameriprise Financial Services, LLC, member FINRA and SIPC. Okay, class. In our next case study, we peer behind the curtain of the U.S. Congress and find out that there are forces at work that might keep them from doing the most fiscally responsible thing.